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Bank of Japan Holds Fire on Stimulus, Negative Rate Unchanged

Bloomberg, Mar 15, 2016

JAPAN - MARCH 14: A sign for the Bank of Japan is seen in Tokyo, Japan, Wednesday March 15, 2007. The yen held near a one-week high versus the dollar and advanced against the U.K. pound as investors reduced holdings of higher-yielding assets purchased with money borrowed in Japan. (Photo by Torin Boyd/Bloomberg via Getty Images)

* BOJ keeps its new benchmark rate at minus 0.1 percent
* Board voted 7-2 on negative rate, 8-1 on monetary base


The Bank of Japan refrained from bolstering its record monetary stimulus as policy makers gauge the impact of the negative interest-rate strategy they adopted in January.

Governor Haruhiko Kuroda and his board kept the target for increasing the monetary base unchanged, and left their benchmark rate at minus 0.1 percent, as forecast by 35 of 40 economists surveyed by Bloomberg. The central bank said it will add easing if necessary while the language in its statement Tuesday indicates a downgrade in its assessment of the economy.

With the BOJ far from its 2 percent inflation goal and growth stalling, most analysts have seen additional stimulus as just a matter of time. The stakes are rising for Kuroda, with household and corporate sentiment waning and investors questioning whether monetary policy is reaching its limits.

“You can see from the statement the agony for the BOJ in the gap between their hopes and the realities in the economy and prices,” said Kyohei Morita, an economist at Barclays Plc. “Japanese inflation is at a level where even the BOJ has to admit its weakness. It is leaning toward additional stimulus and I expect it to be in July.”

Economists surveyed by Bloomberg have judged that a further cut to the negative-rate policy is the most likely tool. Kuroda said at a post-decision briefing that he doesn’t need to wait to see the full impact of the negative rate before acting again, if change is needed.

The BOJ exempted money reserve funds from the negative rate as it irons out kinks in its new policy and seeks to placate some institutional investors who are unhappy with the measure. Even so, Kuroda said he hasn’t changed his thinking on the negative rate since its announcement in January.

The yen advanced to 113.05 per dollar as of 4:59 p.m. in Tokyo, about 6 percent stronger than it was at the start of the year — an appreciation that has undercut the competitive advantage that previous BOJ easing had won. The currency’s gains are a risk to growth in corporate profits, especially among Japan’s exporters, and to inflation because of lower import costs.

The central bank said it “will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions — quantity, quality, and the interest rate — if it is judged necessary for achieving the price stability target.”

Since the BOJ’s last meeting on Jan. 29, economic data have shown little momentum for a recovery from a contraction in gross domestic product registered in the final quarter of 2015. The BOJ’s key consumer-price measure didn’t budge in January, and sentiment among consumers and merchants has slumped.

The central bank conceded in its statement that exports and production have been sluggish, while maintaining its view that there has been improvement in employment and income conditions. It noted that inflation expectations have weakened recently.

Masaki Kuwahara, an economist at Nomura Holdings Inc., said the BOJ has effectively cut its economic assessment.

“The downgrade may mean that the likelihood of further monetary easing increases,” Kuwahara said. “Spring wage talks are looking dull, and the price trend may weaken in the coming months.”

The decision to adopt a negative rate — a 0.1 percent charge on a portion of money that commercial banks park at the BOJ — had an impact even before it took effect in mid-February. Yields on more than 70 percent of government debt dropped below zero and bank shares tumbled on profit concerns.

Takahide Kiuchi was the sole dissenter on the decision to keep expanding the monetary base at an annual pace of 80 trillion yen. After a 5-4 split in January over the adoption of the negative rate, the board voted 7-2 to continue with the measure, with Kiuchi and Takehiro Sato against the policy.

The hope is that by bringing down borrowing costs, the strategy will spur companies to borrow and consumers to spend. “It is an absolute benefit that is going to transmit into increased purchasing power,” Jesper Koll, the Japan head of WisdomTree Investments Inc. in Tokyo, told Bloomberg TV.

Japan’s central bankers haven’t been alone in seeing financial markets move against them; along with the yen’s gain, stocks tumbled in February, following the Jan. 29 move.

The European Central Bank on March 10 unveiled a more aggressive dose of monetary stimulus than many analysts had anticipated, yet it still disappointed many investors. The U.S. Federal Reserve will conclude its policy meeting Wednesday.